Tuesday, February 27, 2007

Islamic banking

Three years ago, I delivered a lecture at the Institute of Objective Studies in Calcutta, titled ‘Islamic Banking: An Economist’s Perspective’.

Very few people know what Islamic banking is or what interest-free economy means. Only some devout Muslims who try to adhere strictly to the Islamic stricture against interest follow Islamic economics. We do not find mainstream academic institutions working on this subject. However, this is something that touches everyone’s life, Muslim and non-Muslim alike. Hence there is a pressing need for wider awareness among people about what Islamic economics means.

There are three aspects of the subject that merit attention. First, a moral, ethical one, which sees interest as fundamentally unjust because the borrower bears greater risk or loss, or has less security of making a profit than the lender. The lender of money is passive, while the borrowing entrepreneur is active; yet the lender commands a return even before the enterprise yields anything.

Second is the politico-economic or social revolutionary aspect. Interest is the means to protect and perpetuate the socio-economic power of those who represent the past (owners of capital) as opposed to those who seek to become something in future. Credit is the only means through which new, creative economic activity can take place. But the emergence of new enterprises, the creation of new wealth and income, empowerment of the poor and the low income group and the realisation of social justice – are all hostage to the urge of capital-owners to secure maximal returns while bearing minimal risk. Interest breeds speculation, which is the bane of productive economic activities.

The third aspect is the faith-based one, of following scriptural prescriptions.

The vision of interest-free economy has the potential of bringing together under a common movement people of Islamic faith, people of conscience, radicals and social revolutionaries.

One could cite anti-usury thinking in the pre-Christian and early Christian era (Aristotle, Plato etc). One could also highlight the underlying conflict in the American economy and society, between the interests of those with old wealth and those with nothing but their dreams, their zeal for advancement, and their labour. The ‘populist’ movement in the USA, led by Andrew Jackson (President, 1829-37), brought this tension to the fore. The conservative policies of the 1920s and the 1980s Reagan era, with their severely negative social distribution consequences may also be seen in this light.

Islamic banking or interest-free economics means that lenders become risk-sharing business partners. Social ethics, community participation and public accountability are inherent in this vision. A brave new world is waiting to be built, but this cannot happen in isolation, undertaken by one community, in a few countries. It must be a global movement of humanity, seeking to build a just world.

The Economist had recently carried an article on Islamic finance. After summarising some of the technical difficulties involved in "mainstreaming" Islamic banking, the article concluded: "None of these challenges is insurmountable. This is an era of financial innovation where investors delight in exploring new areas of risk. Cultural barriers are there to be crossed. "

Reading this, it struck me that Islamic economics is a conception whose time has now come.

Enlighten me as person ignorant about this issue. Does Islamic Banking allows lender to charge interest if entrepreneur becomes successful and start generating profit? Why is it assume that loan is always taken for entrepreneurship? It could as well be for fun on borrowed money. Interest is very simply rent on borrowed money. If interest has to be eliminated, all rental businesses should stop charging rent, be it house or boat or band for wedding. Any transaction involves transfer of money for service or product. Why should interest which is rent to use the money for desired period (either in making business or burning it, lender has not concern) be any different?

Hullo Irving. Islamic banking would mean a sea-change in attitude and outlook. The owner of capital becomes - directly or indirectly - an active risk-sharing entrepreneur, rather than a passive interest earner. If an individual with money to spare wants to give out this money - s/he could also do this through a company that gathers such funds to invest in various ways. The individual would know that there is a risk of loss as much as ther's a likelihood of profit.

Thanks for your comment Ashish. You have raised some important questions. If an enterprise becomes successful, then the owner of capital would start earning a share of the profit.

Economic theory distinguishes between "rent" and "interest". But yes, in practice, one can see the "interest"-like aspect of rent. So yes, the same principle should therefore apply.

Living on borrowed money - this is a very modern development, and is simply a legal fraud! Capital requirement for non-enterprise purposes: this can also be worked out, going back to the principles. Thus e.g. if I wish to buy or build a house, then I am obliged to share a part of the value of the property with the person who made available the money for its purchase / construction. If I get money to meet an urgent need - a child's marriage, or hospital expenses - then I'm obliged to pay a charge for this convenience. But that won't be interest. Basically, the whole understanding and working of the economy has to be reconceptualised. But then don't the ideals of human development and justice, as well as environmental sustainability, also require a radical reconceptualisation and re-engineering of the global economy (which is presently structured around profit at any cost)?

interests as we undertand today is actually a theft. Just look around the number of people committing suicides as they fail to repay the loans which gets fatter and fatter by the day. In India the situation is worse among the poorer section of our socitey-both rural and urban. Re-conceptualising the same today keeping in mind the Islamic principles is the need of the hour. Thank you Swamiji for highlighting the same again as you had done in the Institute of Objective Studies.

pierre proudhon the anarchist said that private property is theft. private capital accumulation as opposed to building up capital for the whole community is itself theft. so after this theft it is pointless trying to dissimulate by not charging an interest or not seeking rent. then there is another problem and that is that it is impossible to implement socialistic principles on a large scale because there are problems of information flow which are exploited by bureaucrats who are in charge of the system for private gain. that is why islamic banking has to incorporate anarchistic small community living also if it is to be successful. which in turn means that the present developmental model which is essentially based on appropriation of capital has to go.

Thanks for your comment Hasnain, and for reminding us of loan suicides.

Hullo Rahul, thanks indeed for your visit and profound comment.

I accept what you say.

However, this is an ideal, an analysis. How is one going to see the expression of this in the real world economy? Can that be brought by fiat? Or force?

I would think that with the humanisation and spiritualisation of society, there will eventually be a humanisation and spiritualisation of economy as well. Of course, the inhuman and base mores flourishing today - are themselves a socialiser. Thus personal notions of what one should do or should not do, what is right and good and what isn't, what a person can be and should be - are also picked up from the society and world one lives within. An "alternative" society - would equally socialise people in "alternative" values.

Here I am reminded of: the Kazakh writer Chingiz Aitmatov's brilliant novel "The Day lasts more than a Hundred Years", a profound critique of Stalinism. But I also felt in that novel a quiet celebration of some new and good things in Soviet society. Similarly, Alexander Zinoviev, a Russian writer, had been a very harsh critic of the Soviet Union. But in post-Soviet times, it became clear that he was not a gung-ho fan of western capitalism either.

"For the society", or "for nature" - how can such values suffuse humanity and economy? Some coercion would be needed - just as there is coercion against murder or child abuse (which nevertheless still happen, large-scale). Education is needed. Incentives are needed. Checks and balances are needed. But essentially this must be a guiding principle rather than something absolute. One has to think of strategic advances in that direction, of socialisation. And not for allegiance to any dogma of "socialism" - but to grant a better, more joyful world to children.

To have Islamic banking, while there continues to be gambling, pure speculative activity, living on borrowed money (and time), and orgies of consumption and sensory gratification (e.g Dubai) - is of course bizarre!

My lecture and post was about a concept, an idea, a value, and what it means, what it implies. At root - is concern for humanity.

sdavid hardiman has written a book called "feeding the baniya" on the way in which the adivasis of gujarat have been exploited by the usurers. in that book he has given a detailed historical survey on how there has always been an aversion to usury cutting across cultures and religions. and islamic banking is an expression of this aversion that is there in the kuran also. what i was trying to point out was that usury is a secondary phenomenon that can arise only after private capital accumulation. if there is private capital accumulation then there will also be usury. what else can one say of the leveraged buyout of corus by tata but that it is an example of modern day usury. the dutch banks which have been the world's leading usurers for close to seven centuries now are the main funders of this dubious purchase whose costs will have to be borne by the adivasis in india who will be displaced to provide the tatas with cheap iron-ore to pay back the heavy debt.as you know i am a hard boiled anarchist and feel in my heart of hearts that there is no other solution to the human predicament other than living in small communities because in large agglomerations we tend to lose our humanness and instead become machines. profit seeking machines.

Thanks for this elaboration Rahul. I think in any effective social arrangement there would have to be scope for utilising human enterprise and ingenuity, fuelled by the individual profit motive. But this can be fuelled as much by an altruistic motive. Individual motives and societal goals have to be harmonised. Private capital accumulation by itself need'nt be a bad thing, if the capitalist has societal concerns. He thus becomes a social entrepreneur.

Yes, I would agree that the world needs to be composed of small communities, if sustainability is to be achieved. But how is that going to happen starting from today's megalopolises? Only after their destruction?! Living in Calcutta, and having recetly travelled to Delhi, Madras, Bombay, Bangalore - cities are ugly, polluted, frightening, toxic in every way. The city is the root of all problems - is how I feel now! As soon as possible - I would like to be very far from cities. But what of all the humble city-dwellers who have no choice but to remain there and suffer and struggle?

Anarchist - I'm increasingly feeling that way. Perhaps only anarchists can help to re-engineer things towards some humanity and sanity!